What is a Working Capital Loan?

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Working capital is the money that’s available to a company on a daily basis.

It’s a marker of their success as a business as well as their overall efficiency.

It’s absolutely vital to have a cash flow to cover inventory, payroll, and any marketing campaigns that you might choose to embark upon. Businesses should focus their attention on maintaining enough capital in order to sustain growth.

Net working capital, then, is a calculation of your current assets minus your current liabilities. It’s even becoming common for lenders to require an extensive guarantee such as the person’s home or other similar expensive collateral.

What a working capital loan does is it allows you to cover your daily expenses despite your inability to cover other expenses. In this way, you can buy yourself some time to gather income based on existing resources.

What different kinds of working capital loans are there?

Credit line or bank overdraft facility

Credit line or bank overdraft facility is one of the types of working capital loans that are available. It means that borrowers only have to pay the interest on an amount of money that’s been overdrawn. This will usually be 1 to 2 percent above the bank’s prime rate.

Short-term loans

Short-term loans tend to have a fixed payment period and interest rate. This kind of small business loan is most often secured, and you might be looking at some short-term debt without any type of collateral if you have a fairly good working history with the bank you’re borrowing from.

Equity funding via investors or personal resources

Equity funding via investors or personal resources is when personal resources such as home equity loans and investment from friends and family are common. This type of working capital loan is pretty common for new businesses who don’t have an established credit history yet.

Accounts receivable loans

Accounts receivable loans are when you apply for loans based on the confirmed sales order value that your company has. You should note that it can be hard to get this loan if you don’t have an established history of paying off your debts.

Factoring or advances

Factoring or advances are when the value of advance loans or factoring is based on credit card receipts in the future. This one is a good fit for businesses that accept credit card payment.

Trade creditor

Trade creditor is when a supplier will offer a trade credit facility if you already have a good record of securing large orders from them. The trade creditor will generally do a thorough job vetting out you and your company.

When it comes to working capital loans, there can be many misperceptions when it comes to what these loans actually are, where you can get them, and what they do. While you could get caught up in a lot of misinformation, there are plenty of ways to find out more about working capital loans. It’s best to take a top-down approach and make sure that the information you have is relevant to your own particular needs and wants. If you do this research ahead of time, you’ll be far more likely to get a working capital loan.

While this list isn’t exhaustive, it should give you a very good idea as to what you will need to do to get a working capital loan.

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